March 27, 2000

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Online Marketplaces:
Construction Boom
continued...page 3 of 3

Related links:

New Market Makers (3/13/00) Marketplaces Bring Order And Efficiency To Supply Chains (2/28/00) Health-Care Replenishment Online (1/17/00)

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In the early going, as with business-to-consumer sites, the most important business goal of a marketplace is to build traffic. Establishing the exchange as the place where key industry players go to transact business is far more critical than turning a first-year profit. In most established industries, large companies aren't likely to switch marketplaces once they get used to using one. "In the oil industry, there's an inherent systemic 'stickiness' to the marketplace," says Chevron's Jacobson. "Oil companies are likely to stick with a site because of the cost of moving to a new one."

"The most successful marketplaces in the next year won't be the ones that make the most money," adds Corshen of Ariba. "They'll be the ones with the most transactions and activity to generate revenue, grow the market, and probably acquire others."

AviationX, Boats.com, and Tradiant all say that if you're not an established player such as Chevron or Azurix starting up a marketplace in your industry, then it's imperative to make deals with companies that are. And if you are an established player, it's equally important to partner with competitors to keep the marketplace neutral and build critical mass in the industry. "The whole business-to-business world, online or offline, is driven by alliances and relationships," says Costello of Arthur Andersen. "You have to duplicate that in a marketplace and be very deeply integrated with key players and partners."

One of the most effective ways to do that is with equity deals that make the industry heavyweights truly invested in the growth of the exchange. Ventures such as Petrocosm are trying innovative "pay-for-performance" arrangements in which companies receive shares of stock based on how much they actually buy through the marketplace.

ChemConnect may be the leader among marketplaces in big-company participation. Its "charter members" with equity positions include two dozen large chemicals manufacturers in the United States, Europe, Japan, and Saudi Arabia. In one week earlier this month, ChemConnect signed up Celanese AG and Bayer AG in Germany as investors. "Get as many parties as you can in your industry to get actual benefits from your success," advises Wasden of WaterDesk.com.

When it comes to technology platforms, buy, don't build. Long gone are the days when marketplace operators had to develop their own applications for E-commerce functions such as dynamic pricing, auctions, and reverse auctions. Even the systems integrators don't do it anymore. "We've been asked to build exchanges from scratch and we'd make a lot more money if we did, but it just doesn't make sense," says Arthur Andersen's Costello. "You simply can't get to market fast enough."

Six months ago, marketplace application suites were a specialized niche served by relatively unknown startups such as TradEx Technologies and TradingDynamics. Those vendors' applications are now offered by the aggressive marketing machines of respective acquirers Ariba and Commerce One Inc. More recently, software heavyweights such as IBM, Oracle, and SAP have entered the marketplace technology fray ("New Market Makers"). In addition, Web integrators such as Scient Corp. have turned their attention to the fast-growing marketplace arena. For content management, Art Technology Group Inc. and Vignette Corp. are among a number of vendors that offer customizable server applications.

Speed is the No. 1 imperative in marketplace construction--Arthur Andersen even offers a "fast-track" program to launch a limited-functions exchange based on Ariba software in 60 to 90 days for about $300,000, with full functionality added later. But scalability is right up there with speed at the top of the list.

"You have to plan for success, because transactions can grow at a rate that will absolutely spin your head," says Ariba's Corshen. "If you build something yourself with a lot of Perl and CGI scripts and embedded database queries, you won't succeed."

One thing is clear: Technology will not be the competitive differentiator in the marketplace game. Yes, the technology has to work, be secure, and be able to scale to handle spikes in transaction volumes. But beyond that, don't get fancy. Choose your platform and get moving.

"New technologies come out every day," WaterDesk.com's Wasden says. "Don't get bogged down on technology indecisions, trying to pick the best technology in each category. Because that's not what will make the difference.

To borrow a line: It's the business model, stupid."

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Illustration by Dennis Harms

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